Three Things to Think About Before You Refinance

There are many reasons to refinance a home, one of which is obviously to cut your mortgage payment down and save some money. As the year closes out there are still some four million homeowners who will benefit from a refinance before the end of 2016. Refinancing is obviously a smart move for many borrowers, but there are some thing you should know before you even consider it. Here are the top three things to consider if you are thinking of refinancing.

Refinancing can be costly. Many people don’t realize this, but refinancing isn’t free. First off, there are closing costs due upfront, which run anywhere from 2-5% of the total loan amount. You can go to your mortgage lender for a ‘no-cost refinance’, which means that they will cover the cost, but you will pay a slightly higher interest rate. The best way to gauge the right situation for you is to calculate how much you would pay for the closing costs upfront, versus how long it will take you to repay costs figured into the interest of the loan. If you won’t break even on the refinance until after you are already planning to move out, then it isn’t the right time to refinance.

Refinancing will reset the life of your mortgage. If you’ve reached the point of your loan where you are actually paying the principle instead of just interest, you should be aware that refinancing will disrupt that timeline. In order to be smart about this, ask your lender to do a side-by-side amortization comparison of your loan to see the difference between your original mortgage and a refinanced loan.

If you have added equity in your home, a cash-out refinance will allow you to take out a new mortgage for more than you owe, as much as 80 percent of your loan-to-value ratio. If you are planning to use the money to add more value to your home, this is a smart move, even though the cash-out refinance interest rates are slightly higher. You should also only do this if home values in your neighborhood are on the rise.